Products June 3, 2021

Investment Product and Service Launches

MSCI new framework to evaluate decarbonization targets and Vanguard announces upcoming changes for dividend funds.

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Art by Jackson Epstein
Art by Subin Yang
Art by Subin Yang

MSCI New Framework to Evaluate Decarbonization Targets

MSCI revealed its new planned framework to assess a company’s decarbonization targets against its net-zero goal. 

The MSCI Target Scorecard will allow institutional investors to make direct comparisons between a company’s climate commitments and ascertain which company has a realistic decarbonization target. This framework development occurs during a period of increase in shareholder engagement by institutional investors and climate activists. 

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The MSCI Target Scorecard will evaluate a company’s climate goals across three key dimensions:

Comprehensiveness – examining how much of the total emissions of a company are covered by the published targets.  MSCI analysis looks at the emission scopes that are covered by the targets, and the activities and geographies covered by the target. Additionally, the comprehensiveness determines whether solely carbon dioxide equivalent (CO2e) emissions are considered, or all greenhouse gas emissions.

Ambition – analyzing how much and how quickly a target aims to reduce emissions. MSCI will evaluate the information on emissions reductions and timeline to draw a company-level trajectory of future emissions. This provides investors with an overview of how a company’s trajectory may deviate at the key horizons of 2030 and 2050 from the path required to achieve net-zero.

Feasibility – assessing how feasible a given target is and how much confidence investors can have in its achievement. MSCI will assess a company’s track record by comparing its expired original target emissions and the reported emissions in the target year. Similarly, the progress made by companies meeting their ongoing targets by benchmarking companies’ latest emissions against the target’s projected trajectory will also be assessed. This will inform the level of confidence that a company will achieve its targets.

MSCI will launch a public consultation in June 2021 with corporate issuers and investors to invite feedback and dialogue on the MSCI Target Scorecard. 

Vanguard Announces Upcoming Changes for Dividend Funds

Vanguard has announced plans to change the target benchmarks for two dividend-focused index funds in the third quarter of this year.

Vanguard Dividend Appreciation Index Fund will change its benchmark to the S&P U.S. Dividend Growers Index from the Nasdaq US Dividend Achievers Select Index. Vanguard International Dividend Appreciation Index Fund will change its benchmark to the S&P Global Ex-U.S. Dividend Growers Index from the Nasdaq International Dividend Achievers Select Index. The respective ETF Shares of these funds, VIG and VIGI, will also track the new benchmarks. 

“As part of our ongoing due diligence process, Vanguard determined that new benchmarks would best enable our Dividend Appreciation funds to perform in line with their investment objectives,” says Kaitlyn Caughlin, head of Vanguard Portfolio Review Department. “We believe S&P Dow Jones Indices’ approach to dividend indexing closely aligns with Vanguard’s views, and we are confident that S&P DJI is well-positioned to administer the indexes moving forward.” 

The underlying methodology of the S&P DJI’s benchmark includes three new features for the funds including:

Buffered yield screens intended to minimize excessive turnover. At each annual rebalance, all dividend-paying stocks in the investible universe are ranked in order of dividend yield with the highest-yielding at the top. A stock will not be eligible for first-time admission to the index if its dividend yield is in the top 25%. During subsequent rebalances, any stock already in the index may remain unless its yield is in the top 15%. 

Free-float adjustments to ensure each index will count only shares that are available to investors. The benchmarks will exclude closely held shares, such as those held by members of a company founder’s family.

A three-day rebalance window to help manage transaction costs and minimize tracking error. The periodic changes to add, remove, or rebalance the constituent stocks in each index will take place over three days instead of one day.  

Additionally, the performance benchmark for Vanguard Dividend Growth Fund will be changed to the S&P U.S. Dividend Growers Index. The fund will continue to be advised by Wellington Management Company LLP, and the benchmark change is expected to occur in the third quarter of 2021. The investment objectives, strategies, and overall portfolio management processes of the three funds will not change, and the expense ratios are expected to remain the same.

Administration June 3, 2021

Helping Sponsors Speak in the New Retirement Income Tongue

DCIIA hopes its new retirement income glossary will help sponsors ask important questions, such as, “Do we want to keep retirees in the plan?”

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Ever hear of an annuity rollover service? What about a money out report, cognitive risk or global risk?

To help retirement plan sponsors that are thinking of offering retirement income options get a better grasp of this new vernacular, the Defined Contribution Institutional Investor Association (DCIIA) has issued a glossary of decumulation terms that will likely get sponsors’ tongues wagging. It is the latest installation of DCIIA’s retirement tier series on how retirees use various types of retirement income services and products to fulfill their income needs as their spending, health and goals change.

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The glossary also includes a section giving detailed, easy-to-understand information on the various types of annuities.

Jody Strakosch, one of the founding members of DCIIA and now a principal, who was in retirement income product development with MetLife for 30 years, tells PLANSPONSOR that DCIIA will continue to issue glossaries as new developments in the retirement planning industry unfold. An example of this is the glossary it recently issued on financial wellness, as this became a buzzword and, in 2016, on automatic features.

The retirement income glossary was born out of the January 20 DCIIA Annual Innovation Forum, “where the retirement income committee was talking about projects it could work on,” she says. Representatives from many different players in the retirement planning industry—including Employee Retirement Income Security Act (ERISA) attorneys and leading investment and recordkeeping firms including American Century, BlackRock, Fidelity and MassMutual—worked collaboratively on the glossary.

DCIIA hopes it will help sponsors ask important questions, such as, “Do we want to keep retirees in the plan? If so, what tools and services should we be offering?” Strakosch says. “We thought it would be helpful to create a glossary to accompany the retirement tier. Literally, DCIIA members went through the initial retirement tier paper to pull out key terms to create the glossary, thinking about it from both the plan sponsor’s and the plan participant’s perspective.

“I personally think having the opportunity to recreate a paycheck in your retirement is an important tool for participants,” Strakosch continues. “Just like the Pension Protection Act [PPA] put plan sponsors at a crossroads in 2006, prodding them to embrace automatic enrollment into a qualified default investment alternative [QDIA], sponsors are once again at a crossroads with respect to helping retirees wisely spend their money with both in-plan and out-of-plan income and annuity solutions.

“Between 2008 and 2014,” she notes, “the retirement planning industry developed a great many retirement income products offering guaranteed income or that are insurance-based, married with an asset manager.”

This is why the glossary includes annuities definitions to help sponsors better understand these new product developments, she says.

“Some products may not be the best thing for every participant,” Strakosch says. “In some cases, they may need customized or personalized solutions. That’s super important for sponsors to realize. That’s why the income annuity section is so important for sponsors to understand, so they can offer these to participants.”

Besides making annuities available either in-plan or out-of-plan, sponsors can also select “an annuity marketplace platform where participants can shop for various brands of annuities, from multiple insurance companies, in an apples-to-apples comparison much like the platforms that Hueler and Fidelity Investments offer,” Strakosch says. “The platform can show participants how much their buying power today would bring them in terms of monthly retirement income, to help them make a decisions about purchasing an immediate income, a longevity or a variable annuity, the latter of which is a little more complicated.”

The Money Out Blueprint

The “money out” term refers to a report that recordkeepers can provide to sponsors on withdrawals at the plan level, much like a blueprint, Strakosch says. If a sponsor couples the money out report with plan demographic analysis, they can get a good sense of their particular plan’s needs.

“It could show them, for instance, that only 10% of their employees are over the age of 40—or, more probably, 60% of the plan’s assets are sitting with 50% of the employees, who are all going to leave in the next three years,” she explains.

With respect to cognitive risk—one of several retirement risks in the glossary—of course this refers to dementia, Parkinson’s and Alzheimer’s Disease, Strakosch says. “Cognitive risk is a big consideration [for participants and sponsors], as is longevity risk,” she says. “Nobody knows how long they will live—but, generally, people don’t realize how long they will live.”

Global risk refers to geopolitical, economic and health events, such as the COVID-19 pandemic—that could impact economies, the markets, interest rates and inflation—and, in turn, threaten retirees’ savings.

Personal Consumption Risk

The glossary also includes the term personal consumption risk, referring to retirees who overspend and run out of money as well as those who underspend, which typically is more often the case, Strakosch says. This term can serve as a compass for sponsors and their plan adviser “to help individuals figure out their personal consumption needs,” Strakosch says.

The bottom line is that DCIIA hopes plan sponsors use the retirement income glossary “as a reference point to help them start thinking about what makes sense for their plan and their participants, and how they want to implement a retirement tier of tools, services and products—if they want to keep participants in the plan. If they do that, their 401(k) is no longer just a savings plan but a true retirement plan.”

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